Word to the Wise – June 2018

Tax Filing Reminders

June 15 – The second installment of 2018 individual estimated tax is due.

6 Tax Benefits of Owning a Home

If you own or are considering owning a home, you can take advantage of many tax benefits. Here are six of the most commonly used homeowner’s tax breaks:

  1. Mortgage interest deduction. You can deduct the interest you pay on your monthly mortgage bill when you itemize deductions on your tax return. This can be a huge benefit, especially in the early years of a mortgage. That’s because typically about 80 percent of your mortgage bill in your first year of home ownership on a 30-year mortgage goes toward interest. Principal payments don’t exceed interest until year 18 of your mortgage.
  2. Property tax deductions. You can deduct up to $10,000 in combined state and local taxes. Called the SALT deduction, this can be used to deduct local property taxes, state taxes, local income taxes and sales taxes.
  3. Closing cost deductions. You can deduct the closing costs of a home purchase in the year you buy it. Including things like mortgage discount points you pay upfront to lower your interest rate over the life of your loan. Because each point costs 1 percent of your total mortgage amount, the tax deduction on these costs can be substantial. You may also be able to deduct certain closing costs. Don’t forget to provide your accountant with a copy of the settlement sheet to ensure proper treatment of all items.
  4. Home improvement tax breaks. If you take out a second mortgage or a home equity mortgage and use it to buy, build or substantially improve your home, you can deduct the interest on that loan from your taxes. This feature is now grouped into your total mortgage indebtedness, which is capped at $750,000.
  5. Energy efficiency tax breaks. There are special tax breaks available for renewable energy and energy-efficiency upgrades to your house:
  6. The cost to buy and install solar, wind and geothermal equipment to your main residence or a second home can be deducted by 30 percent.
  7. Energy-efficient upgrades can be deducted by 100% for items such as central AC, furnaces and water heaters, capped at a total of $500.
  8. Capital gains exclusion. You have the ability to exclude up to $250,000 of profits (or $500,000 if you are married) from the sale of your home, as long as it’s your primary residence and you’ve lived there at least two years.

Remember, if you’re thinking of buying a home, you may want to make a tax review part of your preparation. Because the tax deductions on mortgage interest and points can be so substantial in the early years of home ownership, they may factor in to how much you can afford.

It’s Tax-Planning Time

Now is the ideal time to schedule a tax-planning session. Your tax return outcome is still fresh, and it’s early enough in the year to make corrective action to take advantage of the numerous new tax law changes taking place in 2018. Here’s a brief overview of some of the new tax issues that you need to plan for now.

#1 Income

Tax rates for both individuals and small businesses have changed substantially. Income tax deductions have also changed drastically, including a near doubling of the standard deduction and the elimination of most personal exemptions and miscellaneous itemized deductions.

  • You need to review your income tax withholding schedule and see where you fall in the new income tax bracket structure. Small adjustments here could save you hundreds.

#2 Bunching

Because of the changes to the deductions structure, using itemized deductions may entail bunching two or even three years of expenses into one tax year. Things like donations to charity and medical expenses that you may have spread across several years are now better bunched into a single year to maximize your tax savings.

  • If you typically take care of medical expenses or charitable donations at a regular time every year, stop until you have a new tax-efficient plan. If you wish to consider a bunching approach to itemizing, you’ll want to make that decision as early in the year as possible.

#3 SALT (State and local taxes)

There’s now a $10,000 combined total cap on deductions of state and local income, sales and property taxes, which is going to impact a lot of people, especially in high-tax states. This may be a big factor to account for if you’ve relied on this deduction in the past.

  • Get an analysis done to see how much larger your tax bill is going to be because of the cap on SALT taxes. There may not be much you can do about it other than changing where you live and own property, but you’ll need to have a clear picture of how it will impact your tax return in 2018.

#4 Mortgage interest change

Home mortgage interest on indebtness of more than $750,000 incurred on or after December 15, 2017 is no longer deductible. Remember, only mortgage interest on debt incurred to buy, build or substantially improve your home is deductible.

  • If you have used a home equity loan interest deduction, you’ll need to review how this will impact your itemized deductions.

These are just a few examples of things that you’ll need to review in the wake of the largest tax law changes in more than 30 years. Take some time this summer to make sure you have a plan in place.

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